9911796707
TMI Blog1998 (7) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... Vehicles. It also has a petrol/diesel pump and a service station. It employs around 30 employees. The authorised sub scribed capital of the company is Rs. 15 lakhs divided into 15,000 equity shares of Rs. 100 each. 3 . The main objects of the company for which the company was formed, as stated in the object clause of the memorandum of association are as follows: "(1)To acquire and take over the business formerly carried on in partnership between Virendrasingh of Chhota Udaipur, Jamshedji P. Panthike and Mukund Amratlal Shah in the firm name of Messrs. Laxmi Motors, now taken over by Mukund Amratlal Shah together with its assets properties and subject to all liabilities and with a view thereto enter into the agreement referred to in Article 4 of the Articles of Association and to implement and carry out the same with or without modification. (2)To acquire the agency or dealership of Tata Diesel Vehicles for Gujarat and/or any other territory and to act as agents and dealers of Tata Diesel Vehicles and to carry out all such functions and things as are usually carried out by an agent or dealer of vehicles." 4. Prior to the incorporation of the respondent-company His Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agarwal Kailash and Associates, a firm of Chartered Accountant which found that sale of large quantity of petrol and diesel during those six years was not accounted for. Another firm of Chartered Accountant namely, Natwarlal Vepari Co. was appointed to look into the financial affairs and they submitted three separate reports dated 18-3-1996 certifying that due to the difference in credit sale, the company had suffered substantial losses in the three years. 7. The respondent-company received a letter dated 31-1-1996 addressed to the Chairman by the Manager (Sales) of TELCO asking them to inform as to who was in the management of the respondent-company. Two circular resolutions came to be passed by the majority directors on 5-2-1996 and 8-2-1996 appointing Homi Panthki and Dinesh Shah as the managing director and joint director respectively in spite of the opposition by the petitioners. On 8-5-1996 TELCO was informed that the Mehta group was without any management or administrative power in the company. The petitioners by their letter of 9-8-1996 protested against their removal from management by contending that the same was violative of article 65. 8. Natwarlal Vepari C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Articles of Association and by contracts at the outset. However, the other group of directors have misconducted to oust the petitioners from their vested right to control and manage the affairs of the company. Petitioners state that this has brought about total loss of confidence and lack of mutual faith and understanding. It is submitted that the petitioners are sought to be excluded from the management, and therefore or otherwise, principles of dissolution of partnership are required to be invoked. This is a case of irretrievable and irreversible deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern. In the circumstances, it is just and equitable that the Company is wound up, particularly on the principle of dissolution of partnership". 11. On behalf of the respondents, an exhaustive reply has been filed by Homi J., Panthki, affirmed on 10-3-1997. It is submitted therein that the petitioners have not come to the Court with clean hands and that they are themselves responsible for the deterioration in the financial affairs of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reply opposing the prayers therein. One Shri Shaukat Saiyed and one Gopal Patel who claim to represent the employees have filed another Company Application No. 58 of 1998 to join in the company petition. The affidavit in support thereof states that there are 30 employees in the respondent No. 1 company who are affected by this petition. The matter was heard at length since serious consequences follow from the admission of a Com-pany petition. However, before the matter was heard, in the beginning itself efforts were made to see to it that if possible a compromise is arrived at between the parties or it is resolved by arbitration. That effort however did not succeed. Shri S.N. Soparkar with Shri H.M. Bhagat have appeared for the petitioners. Shri B.J. Shelat with Shri G.N. Shah appeared for the respondents and Shri B.B. Oza with Vanraj Parghi have appeared for the workmen. 14. The learned advocates have ably assisted me in going through the record of the case as also the relevant statutory provision and case law. Shri Soparkar, the learned counsel appearing for the petitioners, as well as Shri Shelat, the learned counsel appearing for the respondents, laid great emphasis on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( xi )entering into contracts with parties other than Telco and Esso for the purchase of goods by the Company which contracts extend over a period of more than one year or exceed in value the sum of Rs. 10,000; ( xii )mortgaging or otherwise encumbering any of the assets or proper-ties of the Company; ( xiii )taking legal proceedings which go beyond the ambit of the usual business; ( xiv )increase in share capital and/or issue of shares in pursuance of such increase." 15. Mr. Soparkar submitted that with respect to the items provided under these articles, for every decision to be taken by the management an affirmative decision of at least one director of each of the three groups was necessary. He submitted that circular resolutions ousting the peti-tioners from management and entrusting the same to Shri Panthki and Shah were therefore illegal inasmuch as the petitioners never consented to that. Mr. Soparkar submitted that essentially the respondent No. 1 was a quasi-partnership. The real nature of the relationship between the parties was necessary to be seen by piercing the corporate veil and if the management of the company was not possible in accordance with the articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the corporate veil and therefore principles of partner- ship should apply. In a situation like this, as observed by the Honourable Supreme Court, in paragraphs 25 and 33 of Hind Overseas (P.) Ltd. 's case ( supra ) , the equitable considerations must prevail over the legal rights. 17. Mr. Soparkar submitted that as in the Hind Overseas (P.) Ltd.'s case ( supra ) , in the present case also the business was earlier carried on as a firm and later on it was converted into a company. He accepts that otherwise the facts of that case were different. He submitted that in Hind Overseas (P.) Ltd.'s case ( supra ) , it was a case of starting a new business venture altogether and mainly there were no restrictive clauses in the articles of association or previleges given to any shareholders or special rights in favour of any party. It was also not a case of equal contribution by all the groups. Mr. Soparkar therefore submitted that what is relevant are the propositions accepted by the Honourable Supreme Court in Hind Overseas (P.) Ltd.'s case ( supra ) . In his view, facts of that case are clearly distinguishable from the facts of the present case and hence the ratio of tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the petitioners from the management in para 19 thereof. Mr. Shelat submits that for all these allegations appropriate remedy was available to the petitioners under section 397 of the Act. In fact, on 19-12-1996 in the letter addressed by petitioner's advocate on page 15 thereof he has in terms stated as follows: " However, my clients desire me to inform you that this step of appointment of Managing Director, each one from two groups, to the total exclusion of the third group is an act of oppression within the meaning of the expression in section 397 of the Companies Act, 1956. My clients reserve their right to seek appropriate relief in this behalf as provided in section 397, and in such an action, relief will also be sought for declaring the circular illegal and for removal of the two Managing Directors who are acting under the spurious authority of such an illegal resolution, and for compelling my clients to resort to such an action, your clients shall be solely responsible both for the costs and consequences thereof." As seen above, the said para is clearly about the circular resolutions removing the petitioners from active management. It is also relevant to note that on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group, there will be deadlock in the decision-making process of the company. The provision of article 65 regarding the meetings of the board of directors is noted above. With respect thereof, Mr. Shelat pointed out that article 1 of the Articles of Association provided that regulations incorporated in Table-A of Sched-ule-I to the Act shall apply subject to what is provided in the articles of association. He therefore submitted that articles of association in Table-A will apply unless there is a provision in the company's articles contrary to the regulations contained in Table-A. As regards the proceed-ings of the board of directors of the company, Mr. Shelat states that some provisions in articles 61 to 66 are contrary to the regulations in Table-A. Thus, for example, the provisions with respect to quorum for the Board meeting and the decisions at the Board meeting were as such. Then, Mr. Shelat pointed out that article 62 provides that quorum of board meeting shall be at least one director from each of the three groups; Article 63 provides if a board meeting cannot be held for want of quorum, the meeting shall be adjourned to such day time and place as the directors present deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent would constitute the quorum under section 174 (5) and thus there will not be a deadlock. 26. In short, the submission of Mr. Shelat is that circular resolutions are not illegal under the provisions of the articles of association read with section 289 of the Act. As far as regular business in the board of directors is concerned, if there are any restrictive clauses in the articles of associ-ation, they are repugnant and the provisions in Table-A of the Act will prevail as laid down in section 9B of the Act and when it comes to holding the annual general meeting even if it could be blocked initially by remaining absent, the adjourned meeting can proceed legally under section 174(5). 27. With respect to above submission of repugnancy of Mr Shelat, Mr Soparkar has pointed out that what section 9B provides is that if there are provisions which are repugnant then, the provisions in the articles of association will give way in favour of the statutory provisions as contained in Table-A. The Act does not prohibit for any additional or special provisions. Mr. Soparkar submits that there was nothing repugnant in the provisions made in the articles. They were merely additional or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made to suffer unnecessarily only because one of the three groups wanted to control the management. Mr. Oza therefore submitted that the petition be dismissed. 29. Both Mr. Soparkar and Mr. Shelat have also taken me through the judgment of a single Judge of this Court in the case of Atul Drug House Ltd., In re. [1971] 41 Comp. Cas. 352. In that case also it was laid down as under: "The principle of dissolution of partnership would be applicable to a company only if the company is a domestic company. Further, there should be irresolvable deadlock in the administration of the company. By introducing sections 397 and 398 the legislature must be taken to have clearly indicated that the irresolvable deadlock should be because of something in the constitution itself" (p. 352) In the facts of the case however the learned judge has held that there was no irresolvable deadlock in the administration of the company and therefore principles of partnership were not applicable to wind up the company. 30. Both the learned counsel also refer to a recent judgment of the Honourable Supreme Court in the case of Kilpest (P.) Ltd. v. Shekhar Mehra [1996] 87 Comp. Cas. 615. The facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further stated that in some cases the principles of dissolution of partnership may apply if the apparent struc- ture of the company is not the real structure. Having noted as above, the Hon'ble Supreme Court again noted its earlier observations in Hind Overseas (P.) Ltd.'s case ( supra ) that the Indian law though modelled on English Statute had developed on its own (as stated in para 31). Having noted the above, in Kilpest (P.) Ltd. 's case ( supra ) the Supreme Court recorded as follows: "This Court observed that although the Companies Act was modelled on the English statute, the India law was developing on its own lines and making significant progress. Where the words used in both the Indian and English statutes were identical, English decisions might throw light and their reasons might be persuasive but the proper course was to examine the language of the statute and ascertain its true meaning. It was apposite, having regard to the background, conditions and circumstances of the present Indian society and the needs and requirements of the country that a somewhat different treatment be adopted. The courts would have to adjust and adapt, limit or extend the principles de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33 . As far as general body meetings are concerned, as noted above, though some difficulties can certainly be created by the petitioners, yet the meeting can certainly be conducted after adjournment under section 174(5). Then also what is material to note is that there are serious allegations of misappropriation of funds and mismanagement against the petitioners themselves. They are facing a charge in a criminal court. In a situation like this, in fact what was expected of them was that they voluntarily step down. They having not done so, if the directors of the other group take over the management, they cannot be faulted for that. Besides, as held by the Hon'ble Supreme Court, normally the submission that a limited company be treated as a quasi-partnership cannot easily be accepted. This is because, as again observed by the Hon'ble Supreme Court, the promoters of a company whether or not they were earlier partners when they elect themselves to avail of the advantages of forming a limited company, they voluntarily and knowingly agree to abide by the provisions of the Act. Besides, as observed by the Hon'ble Supreme Court, the CLB has wide powers under section 402. In the present ..... X X X X Extracts X X X X X X X X Extracts X X X X
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